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Time to unveil QE4? After a blast of buoyancy inspired by the Fed's latest attempt to rouse the economy from its drowsy ways, darned if the stock market didn't take to the hammocks again. Happily, the letdown was likely too predictable to be anything more than a pause to give traders a chance to catch their breath before returning to the fray, their appetites whetted by the smashing rally that lifted some of the indexes to four-year peaks.

One key reason we think equities aren't quite ready to turn tail and take a real dive is that the woods are too full of skeptics now that the Fed and its counterparts around the globe have shown their hands. Somehow they put us in mind of the kid surrounded by a huge mound of barely opened gift packages on Christmas morn asking, "Is that all?"

Not, let us hasten to add, that the world isn't still beset by fading economies and deep fiscal challenges. Of course, it is. And, however welcome the efforts of central banks and governments here, there, and everywhere to try to turn the treacherous tide, there's no guarantee those remedial measures will provide more than momentary respite.

But our sense that the stall in the upswing in stock prices isn't an ominous precursor of a drastic change in market direction is based largely on the vibes we get from investor sentiment. While bullishness may be on the rise, it has yet to reach those maniacally torrid levels that set the stage for a real swoon.

A less sanguine view is that of the savviest market watcher we've had the great good luck to know whose wise words we've passed along more than once and whose passion for investing is matched by his desire for anonymity. Although his take at the moment differs from our own, we feel constrained to share it with you because it's invariably sensible and unlike 99% of sell-side strategists–a conservative estimate—and he's not in the business of peddling stock to widows, orphans, rich people, and other innocents.

The Street, he says, is showing signs of embracing the notion that you can't fight the Fed when it's bound and determined to lift that crucial duo of stock and house prices. There's always the chance, he concedes, that the crowd is right and the Fed can have its way with markets and extend the cycle. But he doubts it.

He points out that there are big differences between QE3 and its predecessors besides the fact that the latest version is open-ended. Thus, when the Fed unveiled QE1 in November 2008 and QE2 in August 2010, stocks were significantly oversold and testing lows. The latest easing move, by contrast, comes after 3½ years of doughty advance from the March '09 depths and a three-month bounce from this past June's reaction low. Most of the widely followed averages, rather than scraping along a bottom, are within spitting distance of their highs.

Moreover, our friend points to the prevailing mood among investors that claims good news is good because it presumably shows that QE3 is working and bad news is also good because it gives Bernanke & Co. another excuse to rev up stimulus. He shrugs and slyly admits that somehow he's not persuaded by the idea that everything, whether favorable, bad, or indifferent, comes under the heading of good news. An obvious delusion that lacks any reasonable claim, as he puts it, to "longevity."

He notes that the Street's response to the Fed's recent action has been that it's the start of a new ballgame. In market terms, he explains, "new ballgames" generate upside breadth extremes and investment stampedes.

That would mean, among other things, that over a 10-day stretch, breadth ratios of nearly two advancing issues for every declining one, and last he looked, the ratio was nowhere near as lopsidedly bullish as that.

For two years running now, our friend observes, markets have vacillated between "risk on" and "risk off." The recent trend has been strongly "risk on," a big plus for such economically sensitive sectors as financials, industrials, energy, and materials.

Small-caps have been outperforming of late, and what he labels "aggressive growth stocks"—we assume that includes
AppleAAPL -1.5351744876157316%Apple Inc.U.S.: NasdaqUSD124.43
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16.657295850066934Market Cap
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1.5108896568351684% Rev. per Employee
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(ticker: AAPL)—have been especially strong. We're not letting you in on any classified info when we pass along his assessment that a number of the risk-on sectors—housing is a case very much in point—during the recent rally went "borderline parabolic," and such outsize acceleration often acts as a warning flag.

He allows that end-of-the quarter buying may support the market awhile longer, but he can't envision "lasting strength at this juncture." Nor does he rule out the possibility that the Fed's action induced a surge on top of an already overbought market that paves the way for a "blowoff ending to this phase of the rise."

IN VIEW OF BEN BERNANKE'S unstinting endeavors to ensure the proper care and feeding of asset markets, it struck us as a little odd that the Fed has been so tardy in recognizing the impact of high- frequency trading. The chairman assumes that a robust stock market tends to make the populace (which counts pesky congressmen among its ranks) feel more kindly toward the economy and, equally important if not more so, toward his agency.

What prompted the Fed's belated show of interest in HFT (to dip into Street lingo) was a series of disasters this year that resulted from demonically fast trading. And there's always the harrowing memory of the flash crash in May 2010, in which the Dow lost close to a thousand points in less time than it takes to read this paragraph.

That's the sort of stuff to which attention must be paid. So last week, the Chicago Fed put out a letter written by Carol Clark, a senior policy specialist (whatever that is) on "How to keep markets safe in the era [we're tempted to substitute error for era] of high-speed trading." The letter was the fruit of a survey by staff members of 30 firms that dabble in one phase or another of HFT—broker-dealers, futures commission merchants (nice moniker), exchanges, and clearing houses.

Ms. Clark, we must say, did a neat job of summing up the pros and cons of HFT, which accounts for something over half of equity trading. That growing roster of software gone awry, along with any number of technological-related snafus, have helped erode investor confidence in the markets, she contends, and cry out "for risk controls at every step of the trading process."

Not the least of the risks she cites springs from the fact some high-speed-trading firms own stock in some of the exchanges on which the trades are executed. There are, to be sure, controls already in place, but not infrequently broker-dealers and futures commission merchants observe them in the breach. What the survey found is that "out-of-control algorithms were more common than anticipated." Shoot the computers?

Ms. Clark suggests after digesting the contents of the survey that the risks of HFT might be mitigated, or at least the financial loss contained, by the adoption of several controls. They include limits on the number of orders that can be sent to an exchange within a specified period; a "kill switch" that could halt trading at various points in the process; intraday position limits that set the maximum position a firm can take during one day, and profit-and-loss limits that restrict the dollar value that can be lost.

The most notable suggestion the survey yielded in our book is that "Each level of the trade life cycle should have a risk manager." A living, breathing, sentient human being capable of spotting trouble quickly before things go terribly wrong. Ms. Clark says that it's a given that "technological advances are here to stay" (high-speed trading, if we may get our two cents in, is a dubious activity to label as a technological advance) and "reverting to open outcry trading is not an option."

She goes on to recall that until roughly a decade ago, "most exchange-traded instruments were traded in a physical, paper-based environment. Orders were called in by telephone, transcribed by humans, and passed on to others for execution, confirmation, and settlement." During every step of the process, someone would look at the order and decide whether a clerical error had been made.

She grants that errors still were made, but "ample opportunities existed to detect and correct them." She asserts that HFT requires a similar level of monitoring, but it has to happen a lot faster—ideally "there should be automated risk controls at every step in the life cycle of a trade with human beings overseeing the process."

To which we say, as you might guess, amen. But our real beef, as we've ranted before, is that high-frequency trading has everything to do with awesomely quick turnover and nothing to do with investing. It's one of the main reasons the individual investor believes the market is rigged, a suspicion, it turns out, not without cause.